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  • Writer's pictureSkyward Financial

Finance Market Update – 11 October 19

We got another cut we expected and should expect a few more. In this update we talk about future cuts, their impact and what happens when the RBA has no more rates to cut.

Almost there

As widely expected the RBA cut the cash rate by 25 points to a historical low of 0.75% in their last meeting, and they are not done, yet.

Our prediction on the next moves is below, but before we get to the numbers let’s take a moment to reflect on the wider scenario, and whether it will become the best case or worst case.

In a positive tone for the property market we are seeing clearance rates stay high, number of new property listings increase, sales turnover improve, mortgage approvals rise, mortgage rate drops, and property prices rebound that should spur on activity and lead into a busy Spring season.

Quite the opposite of this time last year when we knew it was going to be a slow season.

Though we are unlikely to see runaway property prices just yet and are entering a slow and steady recovery to recoup the ~10% lost on the average Sydney property, but serious headwinds persist.

One of those headwinds is employment.

As I've talked about a few times before the RBA is trying to change your mind playing a numbers game to try and achieve its desired targets, of which, employment is the most important because in their view lower employment will lead to inflation, and inflation is needed for economic growth and stability.

There are challenges with the 'cuts rates to get growth' approach, and its shortfalls are visible.

The RBA is in a bind though, because their main ammunition to achieve their targets is through monetary policy i.e. moving the cash rate up or down to speed up or slow down the economy.

This is an old school economic mechanism for a new world and many developed nations are facing persistent low rates environments for the foreseeable future, including us down under. I also believe there is an element of cultural bias in Australia towards working the minimum amount required or doing things to lowest spec, keeping us from innovating and becoming a diversified and highly productive country.

But so what, rates on my mortgage will stay low for longer, that's awesome - right?

Cut to the bone

Our prediction is that the RBA will cut the cash rate by another 25 points in their November 2019 meeting to 0.50 and again by another 25 points in the February 2020 meeting to bring the cash rate down to all time low of 0.25%.

After all of this, they will put the knife away for a till the middle of 2020, or until the inevitable recession hits - when the cash rate goes to zero or potentially negative.

You heard it here first!

But before we get to zero….

When the next cut happens in this historical economic moment in time we will see the big banks will only pass on between 0.07 and 0.12 points of the 25 point cut from the RBA and see mortgages for as low as 2.69% or below.

For cuts after that, we might get 0.05 passed through.

Then comes the big easy, of the quantitative style.

A general view is that there is a limit to how effective rate cuts can be and once that source of ammunition is exhausted, centrals banks must use what is commonly referred to as 'unconventional monetary policy' such as QE and negative rates.

"Quantitative Easing" (QE) is a central bank monetary program that was popularised in America during and after the 'Global Financial Crisis' from 2008. It essentially means the central bank will buy financial assets like bonds issued by banks, in order to keep liquidity (money in the banks pockets) in the market and the market (banks lending money) functioning as normal as possible.

It basically means the central bank pumps easy money into the financial sector in a hope that the banks will keep lending to people who will keep spending and will keep the country ticking along. To kick the can, the recession, down the road.

This is what has been happening in America, Japan and Europe and in certain cases coupled with negative interest rates.

Back in an update in August we said the era of negative interest rates was approaching.

But it will be a while before a big Aussie bank pays you to borrow money, as is what happens when there are negative mortgage interest rates in certain Scandinavian countries.

If we get to zero and QE kicks in we are basically kicking the can down the road, again.


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